Video Transcript: Monetary Reform Proposals - Lucas M. Engelhardt

So our topic this afternoon is monetary reform proposals. One thing I want to  say just, just kind of we're getting started is that I'm not really going to be  thinking too much about kind of the ethics related to money, because my ethics  are not very good. My ethical philosophy background is not that strong. Come  on. Okay, I'm glad you caught it. Was a joke, though. That's that's good, that's  good. But if you are interested in that topic, you certainly have options available  for you. I'd recommend, for example, Guido holsman's ethics of money  production are also the first part of Greta de Soto's money, bank, credit and  economic cycles. Look very much into these ethical, legal kinds of questions. I'm more interested in kind of economic analysis and what types of policies might  we want to think about going forward to potentially solve some of the problems  that arise out of the monetary sphere, right? So first, before you start reforming  something, it's good to show that there is actually a need for reform. I think by  now, we already are convinced of that. I hope so. I'm not going to go too deep  into these two things, but I think there are two big problems that we've pointed  out over the course of this week that are very connected with the monetary and  banking systems. The first of those would be hyperinflation. Hyperinflation, we  know is fairly rare, but extremely destructive when it comes through. So ideally,  we would like to have a monetary system that can prevent right, hyperinflation  from happening. But second, which is a far more common problem when we are plagued with time and time again, is the business cycle. We have found this is  also very connected with the monetary and credit systems. So be kind of nice if  we could design a system that would prevent the business cycle, or at least  dampen its effects, make it less likely and less severe, right? So that's really  kind of the big goals from an economic standpoint that I would like to get right  out of any type of monetary reform, right? Get rid of hyperinflation, or make it at  least less likely in the business cycle. Now, Professor herbner already  described, kind of, in a free market how a monetary system would work, right?  That we would have our entrepreneurs each producing whatever money they  happen to like an experience that has tended to be a gold based money. If  there's a greater demand for money, then we would tend to see, right? It's more  profitable to produce money. We produce more money. That's the way new  money comes into the system. We've also seen this is certainly not the way that  things work in our system. It's very different. We're operating under a fiat  currency where, at a whim, right? Janet Yellen can get together all of the FOMC, call an emergency meeting, decide they want to increase the money supply, and it happens, or we could have, as we know that banks have a certain number of  reserves that they're currently sitting on, right, they may decide it's time to take  these reserves and release them, lend out these reserves that they're sitting on,  legally, they're allowed to do this. And this can also create these disruptions. And so we need to think about we have kind of some idea where the source of the  problem is. So let's look at some of the reform proposals that have been 

presented. I'm looking both at non Austrians and Austrians as well, to kind of  take a broader view and see where are we kind of getting the problem right and  perhaps solving it, and where are we missing it? So first, if you look in the  mainstream literature, kind of the big debate over the past, actually, it's been  several decades now, has been this idea of discretion versus rules. It doesn't  make sense for us to have right a group of people like the Federal Reserve, like  the FOMC, get together and think about what should happen with the monetary  system, and then, using their judgment, go out and make whatever policies they  happen to think would fit. I think probably the strongest argument against this  system came from, I'm going to confess. Milton Friedman, he had a really good  line in Capitalism and Freedom as he's talking about the Federal Reserve. He  was no fan of the Federal Reserve. You can get something right, occasionally,  even if you're wrong on money, most of the time, you can at least get one thing  right. And what he said was that any system where such a small group of people can cause so much harm to so many people, is a bad system, right? Okay, now,  now we can even say, right? Maybe Janet Yellen is very well intentioned. She  doesn't seem like a bad person. Whenever I see her speak, she seems maybe  somewhat boring, right, but that's that doesn't make you bad, right? So she may  be very well intentioned, but as I learned watching Sesame Street as a child,  everyone makes mistakes. Now, normally, if I make a mistake, I pay most of the  cost of that mistake. There may be people close to me a big part of the cost.  When we're talking about the monetary system and they start making mistakes,  we all get involved, like it or not, in business cycles are in hyperinflation. We are  all victims of these mistakes. So even if we grant good intentions, we still have a problem with the system. So Friedman then would advocate, we need some  kind of rule instead, let's take human judgment out of it. Mistakes are simply too  costly, right? So let's find some kind of automatic way that monetary policy. Can  run right that way. We eliminate the possibility of mistakes. Now, before I get into some of the specific rules that have been proposed, I do want to say just kind of  three general comments about rules and not about rules in general, rules for  monetary policy. The first problem with a just the idea of a rule for monetary  policy is a political problem. After all, the Federal Reserve is a creature right of  the government. Now, I wouldn't say it's a fourth branch of government. Has this weird structure connected both with the banking system and also with the  government's odd connection between the two. But at the same time, we know  that it exists because Congress passed a law. It created it if we want to eliminate the Federal Reserve, it would then follow. Congress is going to have to repeal  that law if we're going to replace the Federal Reserve. Okay, see, okay, right. So Congress is going to have to repeal this law replace it with something else. So  this now puts monetary policy in the hands of Congress to decide what kind of  rule we're going to use again, even if we grant good intentions to Congress,  which may be a stretch, but even if we grant that, I know very few monetary 

economists that I would trust that are in Congress, we're going to have Ron Paul draft this legislation somehow doubt it, right? So, so we're going to have people  that really don't understand what's happening. Okay? So now what we're talking  

about is them potentially making a mistake that gets written into law, and then  we just make the then we just make the same kind of mistake over and over  again, instead of different mistakes from time to time, you also have the  problem, or even if they happen to stumble upon a good rule, we have to trust  them not to touch it afterward. Now, I think recent experience does show that it  is actually possible for Congress to pass a law that then they have a really hard  time getting rid of this Affordable Care Act, right? It's just kind of wild. I admit, I'm not a very good entrepreneur on my foresight. It's not very good, right? I often  predict things badly. I'll talk more about this in my talk tomorrow. And I definitely  thought, okay, there are enough Republicans in Congress. They're just going to  get rid of this thing, and we're going to be stuck with this back and forth. With  this back and forth. Republicans take over everything and then get rid of these  laws, and then Democrats take everything and they come back, and we're  gonna have this horrific regime uncertainty in all of these industries. But no, it  turns out, not even the Republicans can get rid of this law despite its problems.  So maybe, right? Maybe politicians can make a law, right, that they can't get rid  of. Okay, Social Security is still with us, and we all know there are problems with  it, right? So, okay, maybe, maybe my political objection isn't quite so bad. Okay,  now, but there are also a couple other more economic issues as well. Right?  One is the issue of measurement error. This is, is there like a nerdier thing to  talk about than measurement error, right? But whenever we make these rules,  we're trying to target something, right? Whatever this thing is, we're going to  have to measure right. Now, it turns out matching right economic concepts into  the real world in which we live is not a perfect thing, right? So for example, if you take, say, any class where they talk about money and economics, you're going  to learn how we measure the money supply, and you learn that we measure the  money supply multiple ways, right? So there's m1 there's m2 there's MZM,  there's the divisive money supply, which I don't totally understand myself, to be  perfectly honest, right? We have also proposed, from our side, the Austrian  money supply, the true money supply. Even the Austrians can't agree, right?  What the money supply should be, is it Austrian or true? So it's not. It's not so  clear. We know conceptually what money is when we look out in the world  around us, what really counts as what people are intending to use as money,  because intent is really a big part of what's going on, right? What are people's  ends when they're holding this thing? Are they intending to use it as money? It's  not always obvious when I put money in my savings account, okay, is that  money that I'm intending to use a medium of exchange, or is that more of a  savings instrument? It's not, not so obvious whether we should count it or not.  So you have multiple measures. Now, I will say, from a scientific standpoint, if 

you're doing empirical work, we don't worry so much about these measurement  errors, right? As long as, for example, m1 even if it's not measuring exactly the  concept of money, as long as it kind of acts like money over time, so m1 going  up, as long as that is happening when real, actual money is going up, then we're okay to do statistical work, right? And yeah, we might be a little bit off here and  there, but if, on average, we're moving the right direction, we're probably okay.  Similarly, with things like price indices, so is the CPI a good measure of prices?  Probably not. But at the same time, if over time, it's basically tracking what  prices are doing, I can run regressions, I can do correlations and basically get  the story more or less right, as long as these errors cancel out over time. The  problem is that when I make a rule and I'm making policy in real time, I don't get  to have my errors cancel out over time. I don't get to take advantage of that fact, because I have to make a decision based on what's happening now in the data  that I have now where there's an error, it might might be I over measured. Might  be under measured. I. Right over time, the over and unders should cancel, we  hope right. But right now I have to decide what the money supply is, so I'm going to end up affected by these measurement errors, period by period. And that's,  that's, that's potentially a significant issue, because it means that even if we  replace people that make mistakes with rules, as long as we're not measuring  stuff right, perfectly, right, right, the rules are going to make mistakes. Then  that's an issue. And finally, one other very important economic issue is that all  these rules assume staticness. In some fact, in some way, there's something  that we're assuming that's stable in the economy. So we can have some kind of  fixed rule that is going to work for us. Okay, all right, so now, having stated some general objections to the idea of rules, let's look at some specific ones. So we'll  start with Friedman. Friedman is probably the best known for coming up with the rule, so let's talk about this. All right. So Friedman's rule very famously, what he  says, he says, We want to increase the money supply. He generally liked m2  was his favorite measure. I guess if I have to choose between m1 and m2 m2  isn't horrible. Okay, fine. So we want to increase the money supply by something between three and 5% per year. Now he would not suggest that we just, each  year, arbitrarily pick something that range, but we decide ahead of time. He just  thought somewhere in this range was going to be the right amount. So we're  gonna have to do more work figure out where exactly in there is right. So to kind of get the logic of this, what he has in mind, right? Is the equation of exchange,  or also known as the quantity equation, right? So MV equals PT, right. So M is  your measure of the money supply, right? V is your velocity. It measures how  many times a specific dollar of that money supply moves through the economy  in a period of time. So how many times is the average dollar spent? Is the idea P would be some measure of the overall level of prices, and then T would be the  number of transactions. So really this is you can object to this equation in itself.  You can object to how useful it is, because really, all we're doing is on the left 

hand side, this is a measure of how much total spending is happening, thinking  about it as money. Here's how much money is money there is. Here's how many times we spend each dollar, because that's how much actual spending is  happening. Other side, here's how many transactions there are. Here's what the price for each transaction. It's just another way of measuring how much we're  spending. So then he uses this right from a theoretical basis, and says, well, like we know the velocity of money is constant, so put a little bar above it, right? That just doesn't move over time. Meanwhile, transactions, this would be somewhat  connected with real GDP, right, roughly, right. So we know that that increases  something in the neighborhood of three to 5% per year. Oh, that's a real  coincidence, isn't it? No, it's exactly the logic he said. So we would kind of like to have a price level that's basically stable, right? So if my goal is to stabilize this  thing, then that means to make the whole equation balance. The money supply  should increase by three to 5% per year. Fairly simple arithmetic. Okay, right?  So, sort of the problems then with Friedman's view. The first is just the reality  that velocity is not, in fact, constant. If you want proof of that, go to Fred. It's  Federal Reserve economic data, just type m2 velocity, and you'll find out,  certainly, since about 2007 velocity in the United States has been very far from  constant, right? It totally tanked Right, right around the time of the financial crisis as it was just an empirical fact. You would think an empiricist would get this right, right? But no, velocity isn't constant, right? So that means this isn't actually  going to work in trying to stabilize what he's trying to stabilize. But there's  actually a more fundamental problem with this, and that even if he's right about  this, we still need to think about, how is this new money coming into the  economy? I would suggest odds are good. He's still planning on putting it in  through credit markets. If he's still putting it in through credit markets, that new  money is going to come in, just as Professor Garrison described, it's going to  suppress interest rates temporarily, but temporarily is good enough, right for us  to cause distortions in the capital structure and business cycles, right? So I don't mind Friedman's rule, if all we care about is hyperinflation, increasing the money supply by a small amount each year, probably not going to hyperinflate. But if  we're also worried about business cycles being the more common problem that  we have, it's not clear it's going to solve it for me. Okay, so there are other rules  out there as well. One of the more popular at the moment is the Taylor rule. I will confess this is probably my favorite of the mainstream rules, so I might actually  be inclined to almost defend this one, right? So the idea of the Taylor rule is that  we're going to have an interest rate target. We know that this is actually more or  less how the Fed operates. Now it has some level it wants a specific interest  rate to be at, right? And you calculate what this target should be, right, based on various economic conditions in particular inflation rates and what they call GDP  gaps, being more or less the state of the economy, right? So if the economy is  booming, then there's a gap between actual GDP and potential or trend GDP. 

Oh, we're in a boom. So in that case, we should increase interest rates if we  have high inflation rates compared to what we want them to be. For some  reason, 2% is the goal, and I don't know, right? So if we have higher inflation  than that, then we need to increase interest rates, right? Okay. On the other  hand, if these things are lower, so inflation is too low, or perhaps even negative,  then we should lower interest rates. Or if GDP caps are negative, right, so we're  falling below economic potential, right? Then in that case, we should also have  lower interest rates. Now interesting to me is the history of how this rule came  about. It really started with John Taylor, who actually kind of liked reading him.  He's kind of a fun guy to read. He gets very upset with what people have done  with his rule too, because they start taking out GDP gaps and putting in  unemployment and that kind of stuff. He yells at Paul Krugman about this, takes  out actual inflation, puts in expected inflation. Ah, it's not my rule. It's my rule. I  get to decide what it is anyway, right? And I, I'm inclined to agree with him. He  should be able to decide it's named after him, right? Feels a little bit arrogant,  but Okay, right. So anyway, right. So originally, as he developed this rule, what  happened was he was just doing some standard macroeconomic modeling in  the mainstream, he was doing a bunch of mathematical stuff. He realized he had to have some way right to model what monetary policy does. And he figured it  makes sense, right, that interest rates should be connected right to these two  things, inflation and the state of the economy. That's what we believe the Fed  responds to, right? So in order to model what the Fed does, I'll just look at the  data. Look what their what looks like their targets are. Look at what inflation  rates have done, look at what GDP gaps have done, and then I'll just run the  statistics find out what they've done. Now you may notice this doesn't sound like you're making a recommendation. It just makes it sound like you're describing  what has happened, and that is exactly right. Originally, the Taylor rule was just  supposed to be purely descriptive. He wanted to put this into a model so he  could figure out what interest rates would do in his model. But later on, he did  further work and showed that the rule that he found that interest rates seem to  follow actually had some kind of nice properties in it. For example, he would  suggest that if inflation goes up by 1% we should increase interest rates by  more than 1% what this is supposed to do then is to put a stamp down on the  economy. It will prevent hyperinflation, that kind of thing, right? So it was kind of  this weird thing where First he said, Oh, this is what the Fed has done. Oh, and  turns out, apparently that's a reasonably good rule in certain parts of it, of  course, then he starts screaming at the Fed recently as after the financial crisis,  they lower interest rates too far. Before the financial crisis, they were also too  low for too long. So he starts using this rule very much in a prescriptive manner.  Now, why do I say that? I don't mind his rule so much. In some ways, I feel like it tries to kind of mimic the sort of things that the money supply might try to do.  You notice how hedging, how much hedging I'm doing here. I noticed Dr herbner

is in the room, so I don't want to say anything wrong, because I was a student  back in the day, so any errors are my own. Trust me, I generally find it's a good  rule to agree. With Dr Herbner, because he's typically right anyway. So let me  make the argument, though, right? So suppose that inflation rates are going up  really, really fast, right? Based on the argument that we made on Monday. Oh, I  made on Monday, right? That suggests, right, that the demand for money is  interest rates are going not interest rates. Inflation rates inflation rates are going  up really fast, okay, that suggests demand for money must be falling, or at least  it's not rising as fast as the supply of money is. It's money is losing value fairly  quickly, right? So a sensible thing for us to do, and the demand for money falls,  is to clamp back on the money supply. You don't provide as much of something  if people don't want it, right? Well, what does Taylor suggests, under these  conditions, you should raise interest rates. How do we raise interest rates? You  decrease the money supply or slow its growth, so we're at least moving the right direction. Now there's no guarantee we're moving the right amount, but we're at  least moving the right direction. That sounds nice. At the very least here we're  admitting that money demand might possibly change, though implicitly, we're  admitting this where Friedman doesn't right, that's a step in the right direction,  right? You could make an argument, maybe right, that in a boom, maybe the  demand for money is possibly, possibly decreasing. Maybe that one's more of a  stretch for me, right? So I can't make that as strongly right, but at the very least  in responding to inflation, okay, the Taylor rule is at least pushing us the right  direction. It seems we still have the same problem, don't we? He doesn't  suggest, right? He actually very explicitly suggests this is what the Fed should  do not that we should eliminate the Fed. Just rather, I don't know, he just likes  having these people on payroll, like. Yes, right? So you should pay these people to pull out their calculators every couple months, right? Plug in his rules say, Oh, here's our interest rate target. And then we, then we move on. Okay, all right, so, all right, anyway, let's, let's keep going as time may get away from me. All right.  So another idea that is out there now is inflation targeting. Inflation targeting is  also fairly popular, and actually, in many ways, I'm going to have the same lack  of objection that I have, and also the same objection I have right to exactly what  Taylor's rule was, because inflation targeting would suggest that if we have  higher rate of inflation than what we really want, right, then we need to clamp  down on the money supply. High inflation indicates the money demand is falling. Clamping on the money supply may, in fact, make sense, again, doesn't tell us  how much right, but it also has other problems. First is that, generally, when  inflation targeting is talked about, what we're talking about is we have, right,  some medium or long term target for what the rate of price inflation should do  over time. Okay, now, so I need to make policy now to determine what the rate  of price inflation is going to be, three, 5, 10, years from now. This seems to take  a great deal of foresight. Is there also an accountability problem here, right? So 

this is not quite so automatic as Taylor is, so instead what we have now, right?  So we know what we're shooting at, we're shooting at this level of price inflation  somewhere out there, right, three, 5, 10, years from now. But how we're going to do that seems to require a great deal of judgment, right? So while it may be true, right, that we don't have strictly a discretionary system, and that the Fed can just kind of decide to do whatever it wants. We at least have a specific goal that  they're shooting for. They still have to use a lot of judgment how they're going to  attain that goal, and that seems to be the kind of thing we're going to run into,  the same kind of problems that discretion on the whole is going to have, right?  Everybody makes mistakes, even if we trust them when they say what this  inflation target is, that they're actually trying to hit it, they very well may make  mistakes in the meantime. Now you also have here a number of measurement  problems as well. So how do we measure the level of price inflation to know  whether we've been successful or not, you take principles of macroeconomics  most places, and they say, well, we like to measure price levels, and you learn  about CPI, ppi, GDP, deflator, maybe the PCE. I'm very much reminded, back in  the day, this was actually jumping back a little bit to Friedman's rule. When Alan  Greenspan was chair of the Fed, he appeared, as he has to before Congress  one of the times, and reportedly, I haven't actually looked up the transcripts. This might be made up, but I'm going to go with it. It's a good story, right? Well,  apparently, right, somebody right in Congress was decided they wanted to ask  Chairman Greenspan this question. Apparently, they were very influenced by  Friedman. They said, well, Chairman Greenspan, why don't we just follow, say, a Friedman rule regrow the money supply by three to 5% every year. And Alan  Greenspan got a very sad look on his face, which required no change, and he  said, Well, we just don't know what money is anymore. One would think that if  the chair of the Federal Reserve doesn't know what money is. We have a  problem, right? But what did he actually mean? Right? Because Alan  Greenspan is very good at just saying things, and then you have to spend  forever figuring out what he meant. Well, if you look at m1 and m2 the two major measures of the money supply at the time, they weren't acting the same. One of them was being extremely stable, the other one was growing, right? So the point he was making is that what I do with monetary policy is going to change based  on which of these two I choose. One would expect we'd have the same problem. Because I know, I've looked at ppi, I've looked at CPI, I think, actually think that  they're kind of cool to watch how they move relative to each other as we move  through the business cycle. It's kind of neat look at that sometime. So which one we're targeting is going to have an effect on how we're running monetary policy,  because they don't act the same way. Right? Here, we have a very significant  measurement problem in that we don't actually know, right? Which of these is a  better measure of prices. There's no if we knew, we would stop using one of  them, right? So we're going to have to make a decision. So additional judgment 

bring in additional problems. Okay? The last kind of some people in the  mainstream have suggested this. There have also been some Austrians, or at  least Austrian friendly people, have suggested this target. That is the end GDP  target. Are targeting nominal GDP. The people that propose this, many of them  would call themselves market monetarists, for those that know their economic  history, you know the term monetarist is very connected with connected with  Milton Friedman. And in many ways, what they're trying to do is correct. My first  objection right to what Friedman is doing here, right? So we have MV equals PT, I'll write it again, because I have nothing else to do. There we go. And what they  say is, well, if we want to, I. Really run the economy, right? Well, why don't we  just stabilize this on this side, right? So that'll keep prices multiplied by the  number of transactions, so total spending constant, and then what will happen is that money supply is going to have to move opposite what velocity does, right?  So, and maybe we don't want this to be constant. Maybe we want it to grow by  three or 5% a year. Here, take your pick. It doesn't really make much difference  to the analysis. At the very least, any changes in velocity, which we know do  actually happen, right? We should offset then with changes in the money supply, right? So suppose that there is this weird time where velocity collapses because we have a financial crisis, and people want to hold on to money because they're  nervous. Hypothetically, well, in that case, but it seems like people want to hold  more money. Well, in that case, we're going to create more money. To create  more money. That last statement looks like people want to hold more money.  Let's create more money. Is, in fact, exactly the way we wanted an ideal system  to work, right? Oh, we found the ideal proposal, right? I don't believe that, but  apparently you don't know me very well, right? So, so what is this missing?  Right? Again, like, like, a lot of these rules, like the direction feels about right,  But what does it miss? First thing it misses, how is this money getting into the  system, right? When we have people like, for example, as I was preparing this  lecture, I looked up a paper by Steve Horowitz and will Luther. I was drawn to  this paper because I actually know will Luther. He's a nice, seemingly intelligent  person. I said that okay, like, I don't want to just criticize, right? This view, on the  basis of critics of this view, it's kind of unfair to criticize Keynes. For example,  just reading people that criticize Keynes, you go and find out. What did he  actually say? Are we being fair? So let's pull out Horwitz and Luther and see  what they actually say, Right? Are we being fair to them, right? And what they  suggest is, they said, Well, this rule is pretty good if we're stuck with something  like a central bank, this is kind of what they would consider a second best rule.  Okay, well, I guess I'm with you kind of, I don't know, this is second best, right?  But certainly not as good as eliminating the central bank. So okay, we've at least got that ordering right. So what exactly is the problem with this? First this new  money has to get in there somehow. Well, for conceding, let's let the central  bank still be there. It's still the central bank injecting the money. It's still going to 

come in through the credit system. We still get the suppression of interest rates,  we still get business cycles. Okay? It's not actually moving us the right direction  of where we want to go, of eliminating that particular problem, or at least limit  limiting it as much as we can, all right? So even though right in some ways, this  feels good, we still have this problem of we just keep putting money in through  the credit system and all of these systems we're looking at. So that feels like a  rather significant issue. All right, so let's move on then just looking at some of  the more Austrian proposals. So here, when I originally kind of practiced this in  my hotel room last night, I found out this lecture took me 70 minutes. I thought, I  need to, I need to make some cuts and restructure things, right? So when I look  at the Austrian proposals, then I'm kind of arranging them into two main areas,  and we'll look at a couple proposals in each of these areas to kind of get some  idea of how Austrians speak about how we should do monetary reform. So first,  let's look at the issue of money itself, right? So what should we do with money  itself? Right? Do we, for example, just love these Federal Reserve notes. No,  we don't. We don't. Now what we should do about it, though, there is some  disagreement amongst Austrians, right? So for example, one proposal is to try to revive the gold dollar, right? So take this paper money that we're already using,  it's already in use, already established as a money, and let's try tying it back to  gold. After all, what that should do? If we tie it strongly enough, it should help  prevent hyperinflation. We can't just produce more gold. And again, if we're  careful with what we do on the banking side, this might handle business cycles,  but we need to get to the banking side to make that particular case. Two people  that made this case for reviving a gold dollar would be a Mises and Rothbard,  two names you may have possibly heard of. Now, they have slightly different  plans, though, for how they're going to do this, right? So Mises, in his 1953  edition of Theory of Money and Credit has a couple points of exactly what we  should do to move toward having a gold based dollar. The first step is to stop  issuing paper dollars. No more of that. Just stop. Secondly, any gold the Fed or  the Treasury currently holds, they have to hold on to through this process, or it's  going to create disruptions, as you'll see in the next step. So the idea is, once  we do these two things, right? So don't sell anything to the Fed and Treasury.  Stop the issue of paper dollars, what he expects will happen is we'll see a  stabilization in the price of gold. Once the price of gold is stabilized, then we can establish a conversion agency that is going to say, Okay, we guarantee now, if  you bring in that number of dollars to us, right, we'll give you an ounce of gold in  exchange, or vice versa, you can bring gold and then we'll give you that number  of dollars. He also suggests so. So this is just, this is the kind of thing Friedman  says fixing the price of gold. That's why I didn't like the gold standard. It's just  fixing the price of gold. And it kind of almost feels that way, except that we  realize it's a redeemability. So you can actually go and change this back and  forth. All right. Another point of this is that he suggested eliminating all large bills,

which in his mind was $5 and up, prices have changed since 1953 I suspect we  have to revise that number upward. But the idea being, he wanted people to get  used to the idea of using gold as money, right? So for these large transactions,  where it's reasonable that you might actually be able to see the gold that you're  using to buy the thing, then have people get used to it. So I just, I just bought a  

new van recently, right? The amount that I paid for it, I'm not going to confess,  because it's embarrassingly low, right, but I could have at least seen the gold,  right, that I was handing over to the dealership in order to get this particular car.  So in Mises mind, it would make sense this transaction should happen in gold,  right? So let people get used to holding these gold coins let people get used to  the idea that gold is, in fact, money, right? So let's undo right, the damage that  was done by pulling gold out of the system and getting people used to paper.  Just undo that. Rothbard presents a somewhat different view that's which is  actually significantly faster in how we can achieve this. And Rothbard suggests  what a system that I call simple division, where he says, let's look at the money  supply, whatever money supply we think we want to have, backed by gold. The  Fed has gold holdings. So do the division right? Find out how many dollars are  out there for each ounce of gold that's in the Fed's gold holdings. And there's our exchange ratio between the two, right? So each ounce of gold, if you bring an  ounce of gold, okay, we'll give you however many paper dollars. According to  this ratio, you can bring in your paper dollars, and we'll give you the gold. Now,  this has the benefit, but if the people decide to, we could actually totally  eliminate the Fed's gold holdings, and it wouldn't actually be a problem. We  hand in all of the dollars, all of the gold leaves Fort Knox, and then we use that  as money directly. This is not necessarily disruptive. If that's what we've decided to do, it's not so obvious. We can guarantee this under Mises scheme, there's  no tie necessarily to where the price of gold ends up and the amount of gold we  actually have. So this seems like a kind of nice system. It's actually a system  that I heard someone in the room, specifically Dr herbner advocate to Congress  when he was called to ask, called there, I think probably by Ron Paul, I would  guess, to talk about monetary policy as a very workable system that we could  actually do okay. The other major proposal that has been offered is the idea of  currency competition. So has been offered, for example, by Hayek and the  denationalization. Of Money, also by Hans Sen Holtz and money and freedom,  and also in many other writings. The idea here is really not necessarily to cause  any fundamental change right to the paper currency we're using, but rather just  to allow other people, allow people to make a choice about what kind of  currency they use, because it finds, because it finds, because you find out,  when you really start looking to the monetary system, we don't actually have this choice. There are many places which we are blocked from having choice and  money, right? So allow people to use whatever currency they like. If I want to  start using euros, okay, fine, let me start using euros. If I want to start printing 

right angle heart dollars in my basement, and I can convince people to take  them from me. Okay, we can use that, right? Why not? So what is it that's  blocking this? First, there is no free entry in currency in most modern  economies. We've seen this proven, for example, with the case of the Liberty  dollar. Many of you probably have not heard of this because the Feds clamped  down on it. It was a man that decided he wanted to start having a silver backed  currency, and he had kind of a clever but confusing scheme for how this is going to work. I don't know that it had good longevity to it, but, but the idea was, he  wanted to try to keep one liberty dollar very close in value right to one American  dollar right. That way you could very easily go into, say, small shops and  convince people to take the liberty dollar instead of right, the American dollar. I  suggest that probably part of that, part of the plan, was part of what got the Feds mad at him, because they suggested that he was trying to create confusion in  the monetary system, and that was going to be a significant problem for him. So  he ended up being put in jail, right for trying to enter into the currency market to  compete alongside the dollar. Another thing that we have standing in the way is  legal tender laws. So with legal tender laws, you look at any right American  dollar, it says this bill is a legal tender for all debts, public and private. That  means, if we enter into a debt contract, then say, I as the creditor, if I happen to  be lending to you, I have to accept dollars in exchange. Now, interestingly,  legally, this is not necessarily true in barter, right? So I could say, No, I'm only  willing to give you this pen if you give me your watch, right? And I will not, in  fact, accept dollars for this pen. It has to be your watch. That's a spot  transaction. That's okay, right, right? But when it comes to debts, right? That's  no longer the case. So why is it right that we should be banned from this? Well,  economically, right, if I have to accept dollars in exchange for any debts that I  give out there, but then I have a pretty strong incentive to just use dollars all the  time, right? So it enshrines right, the official currency, the legal tender, in  people's minds and also in people's behavior, so that then it becomes very  difficult, right, for any competition to come in. So eliminate legal tender laws.  Now that doesn't mean that people have to stop using the dollar, right? It might  be that they still find it perfectly acceptable to continue making debt contracts in  dollars. Maybe people will just keep using dollars left and right, just as we do  now. Maybe these competing currencies won't actually be able to compete very  well. That's possible, but at least here now we know that that is what people  have chosen, rather than what has been forced upon them. Another thing that  specifically senholdt suggested was having honest minting as it is now, right?  The US Mint does still mint silver and gold coins, and you can buy them as  collectors items, and they do actually have a legal tender value printed right on  them, and that value is a very small fraction of the melt value of the metal that's  inside. I actually have, I admit, I don't hold much physical gold or silver. I'm not  wealthy enough to own any gold that I could potentially see. And I have, like, 

one silver coin and sits in my desk. Actually got it. I think it was right after I got  back from Mises U as a student, so I've had it for a while, and it has gained in  value. So I'm not one to say, put all your money into silver, because it kind of  stopped gaining value a few years ago. That's okay, but it has printed on it right,  $1 so if I go into the grocery store, I can, in fact, spend this, something like 99%  pure silver coin. I can, in fact, buy something worth $1 with it, and it's a one  ounce silver coin that, if you melt it down, that silver is worth about 15 or $16 so  it makes absolutely no sense, right, for me to go out and try to use this thing as  a money right? Rather, I just want to buy it either as an investment, as I think it's  going to gain value in the future, or perhaps, do you think it's kind of fun to have  silver around so it's actually kind of a consumption good, right? So you might  buy it for these reasons, but there's a significant barrier there, simply because  they put that $1 on the coin. If all I had on it was one ounce or point nine, nine  ounce silver suddenly becomes much more useful, because now we can make  an argument. Well, this silver is actually worth 15, $16 and if you take this right,  it has some nice properties to it, right? So it's very durable. You don't have to  worry about this getting shredded up or something like that. So we could start  making an easier case. But as long as that $1 is on it, as long as that $20 is on  an ounce of gold, absurd. It's like almost 100th right? The actual value of the  gold inside that coin. It becomes very difficult to use the thing. So very simply,  we just want them to change the minting plates. Get rid of that $1 get rid of that  $20 just tell me how much gold, how much silver is in that coin. And then if  people want to use it, they can use it very, very simple. Okay, so you may notice  that currency competition is not really asking much of the legal system. We're  not saying we need to start paying our taxes in gold. No, you want to keep using dollars for that? Go ahead. The government wants to keep paying all its  expenses in dollars. Go ahead, that's fine. Now you might find if people decide  they don't like the dollar, it's gonna be a lot harder for you to actually buy  anything for the government. Okay, so maybe we have some idea of why these  barriers are there. Okay, all right. So those are these two big proposals, right?  First, reviving the gold dollar, tying the dollar we have back to gold. Secondly,  just allowing for a currency competition. So let's move into banking with the  remaining time. And so here again, there are two proposals. One is the idea of  fractional reserve, free banking. Now here, Professor herbner has already given  something of a critique of it. I'll add just a little bit to it, mostly in the area of  jokes, actually. So here I was looking at that paper from Horwitz and Luther and  Horowitz and Luther. Layout, okay, well, this is our what we're advocating, but  they actually specifically avoid telling you how their system works. They say, if  you want to see about the mechanics of how this works, here's the paper that  you need to read, and it's Seljuk and white, a paper, and I love this title. How  would the invisible hand handle money? Very clever. Published in the Journal of  Economic Literature, which is a very well respected journal. It's one of them 

published by the American Economic Association. It's A a plus journal by most  rankings, right? So very, very good. So that, okay, I'm in for a good one,  probably more math than I want to read, but this is going to be a pretty good  paper. Let me tell you. First, I ran into a significant barrier as I was trying to read  this paper. Here's what it was, okay, right? So what they end up boiling down to,  it ends up the Journal of Economic Literature is less mathy than some of the  others, so it was really this one big equation, right? So they're looking at the  level of reserve. That's R the banks would want to hold under this system of  fractional reserve free banking, and they say this is related to b. You don't really  worry about B. B is just some parameter. It ends up it's actually meaningful.  They hide the interest rate inside of that. It's true B is actually a ratio where the  interest rate is in the denominator, but they want to hide that sigma that some  level of, you know, how much variation are we going to see, and how much, how many withdrawals we have versus deposits, right? So how much instability in  effect is there out there in the banking system? Right? There's MV that should  feel familiar to you. We just saw that, and it actually came from that other  equation, which is significant here in a minute, right? And then the number of  transactions also should feel significant, and for various statistical reasons, that  it's more mathematical reasons that ends up coming in, it has a square root,  then they say, what we need to do now, right? In order to show how this is going  to work, oh, this is not. This is actually where they end up. I made a mistake. So  I guess I should forgive them, because I'm going to criticize them for making a  mistake. So what they said originally was, I can reconstruct this fairly easily. Oh,  don't forget the B. There we go. All right. So they add this equation where it's  related to the price level, the number of transactions, and they say, let's get rid  of the price level, right? So MV equals PT, right? So we need to solve this thing  for P plug it in, and we end up here, right? All right, how many people have had  eighth grade algebra? There's a problem with this that was missing. Oh, this is  in the Journal of Economic Literature, one of the most respected journals in the  economics profession and referees read this thing and didn't find this and like it  could be maybe there's a typesetting error, but then I go forward in this paper,  and they end up plugging something in for t and treating that as one half right?  So made the same error again, and although weirdly, the stuff they plugged in,  they actually end up with a negative sign in some of the stuff, because they do  division. So they keep acting like it's one half liter in the paper. So okay, I'm  going to nail them, because clearly this is significant. Then they say, so what  we're going to do is assume the level of reserves in the economy is constant.  These things are constant, and this is constant. It doesn't matter what that  exponent is, if the thing is constant, right? So what did they just do? Right? Well, we're back there. We can see now why Luther and Horowitz liked this system,  because it's like the system before, with Ngdp targeting. Because this, what they think is the best system, ends up on the same exact grounds, theoretically, that 

is, it's all about we're multiplying M and V multiplied by each other, right? So that means when, for example, velocity falls right, because people really want to hold a lot of money in order to offset that, just for the math to hold, we're going to end up increasing the money supply. But how does this happen? In a free banking  

system, the banks create additional fiduciary media, puts it into credit markets,  suppressing interest rates, ultimately creating business cycles. So it doesn't  solve the problem. All right, so one last system, which this one I can describe  fairly briefly, that is full reserve, or 100% reserve, free banking. I'll still use this  term free banking, because I want free entry. Anybody who wants to open a  bank, I'll let them do that, right? But they have to operate by holding 100%  reserves, any money I put in as a deposit right to be held, right, securely, right,  for me to then come redeem at any point that I wish in the future. Right? They  have to hold on to all of that money that I'm putting in. It's 100% reserves. It  ends up there are lots of non Austrian advocates of the system. Milton Friedman actually suggested this is a system, a good system. Why? Because you want to  control the money supply. You can't give the banks any freedom to mess with it  like the free bankers would, right? So you like 100% reserves. John Cochran  from the University of Chicago also has recently suggested this is a good  system. Lawrence Kotlikoff, who is not an Austrian, but a lot of his work, I find, is very friendly to a lot of the things we say, right? He also has come out in favor of the system. Weirdly, Paul Krugman has gone so far as to say that this system is  worth talking about, one step at a time. Okay, so that's good. Ends up this  system was also advocated by many Austrians, by Rothbard, by Mises in 1953  in that theory of money and credit, that was another part of his proposal, in  addition to re establishing the gold dollar and also Jesus suerte de Soto. So all  of these suggested that we need to establish some kind of 100% reserve  system. Now, Mises did take the view that 100% reserves, we may not impose it immediately, but rather going forward, any deposits you make, the bank has to  hold on to it. So we're already on a fractional reserve system. Let's just not  make that worse. Right then we won't get further disruptions in the economy in  the future. Now, I actually wrote a paper about this. Don't think too much of this  is Mises daily articles. Is not an academic paper purely for a popular audience  called 100% reserves. Now this is right after the financial crisis, December of  2008 and what I observed was. I just, I was looking at are things like the money  multiplier and so on. Wait a minute. Because of how active the Fed has been in  injecting reserves into the system, and because of how hesitant banks have  been to actually lend anybody money, we actually have over 100% reserves in  the banking system at that point. So 2008 I observe, like the Fed could actually  just declare everyone has to hold 100% reserves. It wouldn't cause any  disruption in the system, because everybody's already holding 100% reserves.  So now, naturally, times change. So I looked just today at the most recent data,  because, you know, we're recovering. Surely banks are lending out money. 

Surely the Federal Reserve has removed, right? Some of these reserves, right?  We don't need them to stabilize the banking system at this point. So based on  our last data, which came from a week or two ago, depending on which of these  numbers we're looking at, we currently have $2.2 trillion in reserves held by the  banking system. When you look at demand deposits, so things like checking  accounts, $1.5 trillion right? So we could literally, I don't recommend doing this,  because it's illegal to recommend doing this right. But if we did happen to decide to go all, take all of our money out of our checking accounts, it's actually there,  we could still right almost 10 years right after this was first the case, we could  still right, implement 100% reserves immediately, without having to put this  messian proviso just going forward. We could do it right now, and it wouldn't  cause any disruption whatsoever. So I'd like to close here, as I'm slightly over  time, with a quote from Hans selds from money and freedom this book is  available in the bookstore. He says that sound money and free banking are not  impossible. They're merely illegal. That is why money must be deregulated. All  financial institutions must be free again to issue their notes based on ordinary  contract. In a free society, individuals are free to establish note issuing banks  and create private clearing houses. In freedom, the money and banking industry can create sound and honest currencies, just as other free industries can  provide efficient and reliable products. I'm going to interject here. What's so  special about banking that we need to regulate it. Freedom of money and  freedom of banking, these are the principles that must guide our steps. Thank  you.